The cash flow industry provides a marketplace where businesses and individuals are able to obtain cash when they need it. One way to generate quick cash flow is to sell an income stream. An income stream is debt owed over a period of time that creates a stream of income for a company or individual that is owed the money.

In the cash flow industry, the outstanding debt – or stream of income – is an asset that can be sold. By selling off income streams, individuals and companies not only have access to cash that may be needed today, but they also eliminate collection issues. Plus, with cash in hand they might be able to take advantage of an investment with a higher yield.

Most income streams sold and purchased in the cash flow industry are privately held, owed to a business or individual, rather than to a bank.

Generating Cash

The process starts with determining the specific needs and goals of a client. Sometimes partial streams may be sold off instead of the whole income stream. This allows a client to meet a particular urgent need while retaining a later stream of payments. The later stream of payments, or any portion of, may also be sold down the road.

Owner vs. Accounts Receivables Financing

The concept of selling an income stream has been a part of the financial services industry for many years. The cash flow industry has roots in two seemingly unrelated methods of finance – owner financing and accounts receivable financing.

Homeowners and commercial real estate investors have utilized owner financing as a method of buying property for decades. In the 1970s, individual investors and investment companies recognized a profit opportunity in those notes, and they began to buy them directly from sellers.
Accounts receivable financing is the second method of financing impacting the development of the cash flow industry. Prior to the 1980s, it was mostly used in the garment, textile and furniture industries and was available only to large companies. 

Categories of Income Streams

Various funding companies can purchase a large variety of income streams. The following are categories by which they are grouped: business-based, collateral-based, contingency-based, consumer-based, government-based and insurance-based. In addition to income streams being purchased, there are other types of loans such as the newest – no-margin call, non-recourse loans against stock.

Business-based income streams involve an existing stream of payments owed to a business by another business. It may also include other types of business funding.

Accounts receivable – also referred to as invoices. The purchasing of accounts receivable at a discount is called factoring. Factoring is a discounted purchase, not a lending service. The process is as follows:

1. The business is advanced a certain percentage of the invoice amount by the factor (funder).
2. A percentage of the invoice amount is held on paper as a reserve by the factor.
3. The factor assumes the right to receive payment on the invoice.
4. The business’s client submits payment to the factor.
5. The business is rebated the reserve amount less the factor’s fee.

Purchase orders and contracts – a purchase order is a formal agreement that a product is going to be purchased at a specific price while a contract is on a service rather than a product. In some cases money can be advanced in order for a business to be able to fulfill an order.

Commercial leases – may include office properties, industrial properties (warehouses, factories), research facilities or retail properties. The property owner sells future lease payments, or a portion, and does not incur debt or pledge the property as collateral or pay closing costs as in a bank loan. In order to be able to sell future lease payments the lease must have an acceleration clause that secures payments for the full term of the lease. This protects the property owner from tenants who do not fulfill their lease agreements.

Delinquent commercial debt – when a business purchases products or services on terms and then defaults on payment of the debt. Delinquent debt would refer to debt that is more than 30 days overdue. This would be sold in pools or portfolios.

Other business-based income streams could include equipment leasing, aircraft leases, construction receivables, medical receivables, sports contracts, bankruptcy receivables and billboard leases.

Collateral-based income streams include payment streams secured by tangible assets such as aircraft notes, marine notes, mobile home notes, RV and business vehicle notes, equipment notes, automobile portfolios, pre-foreclosed mortgage portfolios, condominium assessments and property tax liens.

Business notes – when a business owner sells a business using owner financing. About 85 percent are sold in this manner. The whole note or partial may be purchased.

Collectibles – high ticket collectible or a collection.

Equipment – printing, computer, office, construction, industrial etc.

Privately held mortgage notes – using seller financing in exchange for a piece of property. Either the whole note or partial may be purchased.

• Residential – houses, townhouses and condominiums.
• Commercial – retail, office, apartment and industrial.

Contingency-based income streams are generated when the amount of the payment may be uncertain or contingent upon outside factors. Examples include:

• Consumer and commercial judgments – this can result from a lawsuit against an individual, business or organization.
• Corporate charitable contributions – a donation made to a non-profit organization by a business or corporation. Corporations may have elected to donate in a series of payments over several months. A funding source could advance a certain amount on future payments. This could benefit the non-profit if it is struggling to meet obligations.
• Royalty payments – a share or percentage of earnings paid to someone who has ownership interest in something generating revenue. They may arise from transfers of ownership in entities such as software, screenplays or other copyrighted works. Also owners of oil or mineral producing land receive royalties.
• License fees – paid to a patent holder for the right to use a name, trademark or other intangible property.
• Others in this category may include inheritances, trust advances and franchise fees.

Consumer-based income streams originate with individuals and are paid to businesses in installment contracts. These installment contracts are usually sold in portfolios. 

Purchasing more than one consumer contract lessens the risk for the funding source of a payer defaulting.

• Health and country club memberships, timeshare memberships and retail installment contracts.
• Delinquent debt – may arise from service providers, retailers, financial institutions, hospitals or any other business that allows its customers to pay using credit.

Government-based income streams are paid by the state or federal government to individuals. Lottery winnings would be an example.

Insurance-based income streams encompass cash flow that originates from insurance companies and paid to individuals. They tend to be from legal proceedings or insurance coverage.

• Annuities – could have been purchased by individual or corporation. It may have been purchased for a lawsuit settlement.
• Prizes, awards, casino winnings – this may include installment payments from corporations, foundations, game shows and casinos.
• Structured settlements – damages paid to a plaintiff over a period of time.

The Transaction Process

Gathering information about the cash flow or income stream situation is the start of the transaction process. Information that is needed differs from one income stream to another. Click here to access typical information needed when utilizing business notes in an income stream transaction.

This information is considered and submitted to an appropriate funding source. Funding sources work within certain parameters, categories and risk factors. Based on the information submitted, a funding source will review the transaction and put together a quote or several quotes for different purchase structures. 

If the seller accepts the offer, the funding source will proceed with due diligence on the transaction. Due diligence may include:

• Verification of the down payment at time of sale.
• The payer’s credit history.
• Tax returns or audited financial statements.
• Cash flow and credit statement.
• Appraisal of the collateral.
• Income/expense reports.
• Copy of the lease for the business premises.

When due diligence is completed and the funding source is satisfied, a title company or attorney may be used to handle the assignment of the business note. The closing process typically involves a long underwriting procedure.

The whole transaction takes approximately six to eight weeks. Underwriting in other income stream areas may take less time depending upon the criteria needed to be reviewed.

When faced with a cash flow crunch, by selling a partial or entire income stream, your clients can have cash now instead of waiting for payments to trickle in. 

About the Author
Valerie Greenberg is a cash flow consultant. Her Michigan-based company, Valerie Greenberg and Associates, works with funding companies and clients nationwide. She can be reached at 248.548.1086 or valgreenberg@hotmail.com.

Information Gathering
The following questions are typical issues to be covered when utilizing business notes in an income stream transaction.

Data on the note

• What is the balance owed on the note?
• What is the monthly payment amount?
• What is the interest charge?
• What is the time period or term on the note?
• What was the down payment amount at the time of sale?
• Is there seasoning or time on the note?
• Is it a first position note?

Data on the collateral

• What kind of business is it?
• What is the approximate worth of the business and its property
• Does the business lease its property? When does the lease expire if it does?
• What is the business location?
• Is the business a franchise?

Information on the payer

• Who is the payer? Does the payer have good credit? Does the payer have previous experience running a business?
• Is the payer an individual or corporation? If the payer is a corporation, an individual in the corporation must personally guarantee the note.

Documentation on the income stream

• Is there documentation for the sale of the business?
  What is the seller trying to accomplish
• Does the seller desire to sell all payments or just a portion of payments?
• How much cash does the seller require, and when?

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